Which tax is better? Self-Emp or Income

Technical topics regarding tax preparation.
#1
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Ok, we have all done one or two projections of Sch C vs S Corp. The saving grace is the SE part that you may be able to reduce with an S Corp.

I have a client who would pay the following:

Sch C - 21,000.00 in SE tax; 2,500.00 in Income Tax = 23,500.00 total

S Corp - 15,300.00 in SE tax; 9,000.00 in Income Tax = 24,900.00 total

Is there any advantage to paying SE tax over income tax? Over time it would increase your retirement income, surely, but is is enough to worry about?

Thoughts/insights?
 

#2
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Please have your client pay the higher SE tax. As things are going now, we're being told that the "funds" for my retirement income will dry up before I get everything I'm entitled to...
 

#3
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That was my Thought! I am just having a difficult time coming up with the speech to convince them to do it! :D
 

#4
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Not sure I am following your example. If you are talking about $21k of SE tax on a Schedule C, that is about a $150k of SE income. How are your income taxes only $2,500 ?
 

#5
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If they are not yet an s-corp, don't.

They have administration costs of a corporation and exit strategies to consider. Why make a change when there is no net benefit?
~Captcook
 

#6
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Taxable income is 93,000.00; tax is only 2500.00 after 10,000 in child credits for 2018.
 

#7
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CaptCook wrote:If they are not yet an s-corp, don't.

They have administration costs of a corporation and exit strategies to consider. Why make a change when there is no net benefit?


I agree with this. Plus if they employ their kids one day they can do it without SE tax until the kids are of a certain age.
 

#8
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Paying SE tax results in higher SS payments when you retire.
 

#9
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Paying SE tax may result in higher SS payments when you retire.
 

#10
Taxaway  
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Also factor in the effects of the s/e tax adjustment for the comparison.
 

#11
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Spell Czech wrote:Paying SE tax may result in higher SS payments when you retire.


The sun may come up tomorrow.
 

#12
Jake  
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For a Sch C business the tax law allows an adjustment to income for half the ss tax which mostly makes up for the difference between a Sch C business and and a Corp business. In Ohio that adjustment is also recognized on the Ohio Income tax return. Unfortunately it is not recognized for city income taxes, nor is the SEHI adjustment to income. But sometimes simplicity outweighs the minor income tax increase. As for any benefit from an ultimate increased SS retirement benefit, for most of us that is minimal due to the way ss benefits are calculated. Lower income taxpayers get a lot more relatively speaking from their ss contributions than higher income individuals. SS, unlike other pensions, is essentially a welfare program in that regard. In addition, all get the same Medicare benefits once they reach the required quarters of coverage. Adding insult to injury, many of us that continue to work part-time pay SS and Medicare tax but never receive any addition benefit from, those contributions. By the time I pay federal, fica, state and city income tax I keep about half of my gross earned income. And if we exceed an AGI of $170,000 married filing jointly our Medicare B and D premiums skyrocket. As the MRD divisor declines that becomes an issue. So far I have been able to keep AGI below that $170,000 threshold via direct contribution to charity from an IRA. I don't think I will be able to do that starting in 2019.
 

#13
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Why is there such a large discrepancy in income tax between the two scenarios?
 

#14
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Still can not figure out why the income tax is so much lower. You will still get the $10000 in child tax credits if you are an S Corp. I think you are missing something here.

My rule of thumb is if you can consistently have $120k or higher of Sch C income, go with the S Corp.

The SE tax saved covers the cost of an S Corp tax return ($2,500) and the state fees, say $500.
 

#15
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I'm puzzled by your results and am wondering if you took the 2018 Social Security wage base of $128,400 into consideration when calculating the Sch C SE tax. If SE tax is $21,000, Sch C income would have to be $189600. As I plug numbers into my Excel spreadsheet and 2018 projection software, S-Corp comes up better than Sch C.
 

#16
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As others have pointed out, your calculations are off.

If you post the calculations for the two projections, we could show you where you made an error.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#17
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On the S-Corp side, why are you calculating SE tax on the $93k taxable income? Does reasonable compensation not come into play?
 

#18
CMBTax  
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In terms of finding the income levels when incorporating makes sense, doesn't the 199A QBI deduction change the traditional calculation of when an S-corp is worth doing?

Previously it was based on whatever SE tax savings there was on the distributive profit, but under TCJA, the calculations I have run make it less attractive to have an S-corp (i.e. need to have higher income levels before worth switching) due to the deceased QBI deduction, as some of the overall profit is paid via W2 (therefore essentially subject to the full 15.3% via employer and employee).
 

#19
lucyko  
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On the S-corp it appears he is using $100,000 as reasonable salary while on the self employment the net profit is $189,600 . I think this sounds reasonable. Perhaps the point we are missing is that in the scenario provided there is going to be a much higher 20 % pass thru amount calculated under self employment status versus S-corp methodology .
 

#20
Jake  
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I am not sure but I suspect that the 20% reduction in income for certain business profits is going to be an adjustment to taxable income and not to adjusted gross income. Thus it will not bring any relief for tax quirks that are based on AGI, e.g. the Part B and Part D surcharges, the thresholds for deductible IRA's, ROTH IRA contributions etc. Any thoughts???
 

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